NAGA, savedroid, and useful ICOs

byte heroes, HydroMiner, Wysker, and cointed (see here for the first three ) were one of the first DACH-based Initial Coin Offerings (ICOs). Now, with the recent ICOs (or announcements) of The NAGA Group and savedroid, we have a few more.

Whereas there is no official definition of an ICO, most would agree that it is a way to raise money. However, it is important that a company should only ICO if there is clear demand for the token. Lack thereof will add unnecessary complexity to the business (with little to no upside benefit), threaten the token’s value and consequently lead to angry users and possible legal issues.

Cryptotokens are still very early in several regards. Besides technical issues (e. g. scalability) lack of historical data (e. g. risk concerns, best practices, existences of bubbles) they are incompatible with users’ “past experiences” and there are macroeconomic considerations.

Cryptotokens’ incompatible with past experiences

Compatibility is defined as “the degree to which an innovation is perceived as consistent with the existing values, past experiences, and needs of potential adopters“ [3]. Studies have shown that cultures who considered hot water only to be something for the weak, neglected boiling it (in order to kill germs and similar) [3] — despite its health advantages — simply because it went against their value system. Similarly, I doubt that we are yet at a point where tokens are compatible with the mass market’s “past experience” in regards to applications and money. Consider, for instance, switching costs.

Switching costs due to price volatility and lock-in: One of the biggest issues with app-specific coins is price volatility and lack of immediate availability. Imagine you have invested 100€ in savedroid’s coin and decide now that you want to use its competitor Clinc. For starters, your money is to some extent locked into savedroid (in contrast to, for instance, paying a monthly fee via PayPal). More importantly, however, is the coin’s value when you need your money. If the coin’s price rose everything is fine, you can take your money back and might even make a profit. However, rest assured that a lot of people will be quite angry when the coin is now worth less and their initial €100 are not €100 anymore.

Switching costs due to learning effects for cryptocoins: Although it might be easy to buy app-specific cryptocoins (as they could be offered directly within the app) and they are thus — on the surface — similar to in-app credits, I believe that cryptotokens are conceptually too new for diffusion in the mainstream. Furthermore, people will want to understand why they cannot use existing solutions (e. g. PayPal) what are the advantages of app-specific cryptocoins and the general past success of cryptocoins. That is a lot of education a company must undergo, especially in uncertain market environments (e. g. they still must fight incumbents and get their business going).

Because of this I am still unsure how much sense it makes trying to convince the mass market to use something so extremely new and unproven, especially in the context of an unproven environment (i. e. the business within which it is applied is still unproven). In fact, NAGA and savedroid implicitly and explicitly, respectively, agree upon that. The fact that NAGA makes its coin optional on their platform is another way of saying that crypto is still too confusing for most people and might, therefore, derail them from using our services. savedroid explicitly says that “There is just one problem: complex adoption barriers for average mass market users!“ [1]. Whereas I do believe that this will change in the future it will require a lot of trial and error and this is simply not something your average mass market user will do, especially not if there are competitors that enable the same without these switching costs.

Macroeconomic considerations

Generally speaking, it is still not clear how cryptotokens will perform on the market. One aspect is financial utility vs. application utility, i. e. how much value there is in hoarding the token instead of using it.

For instance, if token supply is greater than demand the token’s value is expected to fall. In contrast, if supply is lower than demand (for instance, because the application is amazing), the token’s value will rise. However, this, in turn, might lead to people hoarding them because they expect their value to grow further. Finally, this implies that the application will be underutilized and in turn show little actual value for the token which might again lead to a decrease in price. The NAGA Group, for instance, has a token buyback program for that in place. This program should ensure that if the token falls under €1 they will buy tokens in order to push the price above €1. Whereas buybacks per se are not a new concept, they are in the cryptoworld. How that will play out is yet to be seen.

Disclaimer: My discussion between financial/application utility and price development are extremely black-and-white and a lot of way smarter people will be laughing — and rightly so — at my dilettante economic knowledge. Nevertheless, I do think that we are still in a trial-and-error phase for economical constructions of tokens and testing on the mass market is not the best idea.

Nevertheless, in regards to demand, it merits to look at its origins which lies in the demand for the business per se and its token.

Token demand depends on business demand and token utilization

A company’s value drives its demand. If people value it, they will demand it. Consequently, if they need a token they will demand the token. If they do not need it (and if the token doesn’t make the offering better), they won’t. Furthermore, if there is no demand for the company in the first place, neither will there be for the token. For company demand the same principles apply to a tokenized company as for a “normal” company ; product-market fit and relative advantage and competition .

Product-market fit still matters

For companies like NAGA or savedroid whose “ICO products” (i. e. products announced together with the ICO) are not yet available, the verdict is still open whether they will succeed. If they don’t, the token will neither. And although NAGA and savedroid are already running, that does not mean that their ICO products are in demand and thus will succeed.

For instance, savedroid. With their current app you can automatically save money for a certain goal. With the ICO they want to “make cryptocurrencies accessible for everyone” [1] and allow users to buy and hold cryptocoins and automatically save certain amounts in cryptocurrency. Generally speaking, bringing cryptocurrencies to the mass market today is bold (see above). Just consider that Coinbase, the biggest exchange by far, has “only” 10+ Million users but has been in operation since 2012 and operates across 32 countries [2]. Furthermore, whereas I really like the idea of automated savings, I doubt that it makes sense to save money in crypto.

Relative advantage and competition still matters

Then, even if you know that there is demand for your offering, one must not forget the importance of relative advantage and consider whether the tokenized solution is better than the established ones. For instance, will NAGAs products be any better with a token than similar platforms like ayondo without one? Similarly, companies like the shopping app Wysker positioning themselves against the Amazons of this world will have a hard time surviving if they are “X with a token” and the “X with a token” is not better than just X. Whereas the situation is a little bit different with Wysker per se (due to its different approach to shopping – „tinder on steroids“ – and reward-based shopping) the point is that competing against incumbents just because you are “X with a token” is risky.

Now, assuming NAGA, savedroid or any other company for that matter, managed to validate their business and have a realistic chance of competing against incumbents they finally must ensure token demand.

Artificial (crypto)token necessity and optional tokens

As mentioned above token demand will drive token value. If there is demand for the application itself and if that application requires a token then consequently there is also token-demand. However, in this context, it must be evaluated whether the token is optional within the application, if the token application is truly new or “shoehorned” and whether virtual tokens might be a better alternative.

Optional token usage renders business demand useless

Even if the demand for a company implies token demand, if the token is not absolutely required to run the application and if the token doesn’t make the offering better, chances are that people won’t use the token. Consequently, the token’s value falls. In the case of savedroid, their token will be absolutely required to use their app. In contrast to this, the same is not true for NAGA. NAGA’s coin won’t be necessarily required in order to use the application but can be used for certain in-app services. This, in fact, implies that the token might be useless from the beginning if these token-related services are not better than the ones you get via fiat money.

“Shoehorned” token usage creates artificial (crypto)token necessity

However, even if a token is an absolute necessity — like in the case with savedroid — the question is whether there is a “need for that necessity” or whether it was artificially created just to fit the ICO model. Such “wrong” application of a new technology to an “old” one appears frequently in the context of new technologies. Often a new technology can be “shoehorned” into the old world without changing the underlying model. The result is a solution only slightly better than the previous one. In the case of the Internet that were the first web pages (even the name page indicates a connection to the old world). Setting a web page online with some text and hyperlinks was not much better than a book. Now with cryptotokens we have a similar situation.

Artificial token necessity: savedroid’s token is one example with such an artificial token necessity. Their token is supposed to be used to pay for in-app services or fees. This doesn’t require a cryptotoken and can instead be solved through premium services, normal processing of fees (e. g. through credit cards) and similar.

Artificial cryptotoken necessity: Furthermore, even when an application needs some form of application-specific currency (e. g. to buy in-game items), one should consider whether virtual tokens (e. g. like in-game credits that you pre-buy) would be more suitable.

All these alternative solutions (credit cards, premium services, virtual tokens) can fulfill functions similar to those of cryptotokens but are more compatible with people’s way of dealing with money, entail no economic complications and have clear laws and regulations (see below).

Finally, not only do all these things make running an ICO and operating the the self-created economy more difficult, they also open potential for “revolting” token-buyers an legal consequences.

(Side note: It might, of course, happen that in the future every application will be tokenized. However, for the reasons mentioned here I doubt that “today” that should be applications where a token makes “some” sense.)

“Revolting” token buyers and legal consequences due to unsuccessful coins

If a coin fails chances are high that a range of token-buyers will start revolting against the issuing company. Not only will this result in angry holders, it will also derail many token holders and potential users from becoming customers and create a bad reputation. Primarily for startups angry token buyers is not the best thing to have, especially as they have other things do (get the business off the ground, fight incumbents…).

Furthermore, although there are yet no legal grounds, people might still try to pursue legal actions. Not only will this drain time and money but will it also lead to bad publicity. Furthermore, at some point law enforcement will kick in and one company will be made example of. And if a company is one of the first to ICO it might as well be the first to be made example of.

Finally, it seems to me that regulators are now starting to evaluate whether an ICO is really required to run your business or whether your business was just “shoehorned” to fit a token model in order to raise capital. Especially in the latter case I have the feeling that regulators won’t agree with many of the things companies are doing in their ICOs.